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Chapter 7 Bankruptcy: Could You Keep Your Car?

In a Chapter 7 bankruptcy, federal and majority of state laws enable bankruptcy filers to exempt a certain amount of equity in their motor vehicles. This is referred to as the motor vehicle bankruptcy exemption.

If You Don’t Have Auto Loan Debt

If you don’t owe money on your vehicle, the value of your vehicle is your equity. In order to keep it, however, you should exempt all or majority of your equity. Otherwise, the bankruptcy trustee would evaluate if your nonexempt equity has sufficient value that he or she could liquidate to your bankruptcy estate. If this happens, the trustee should give the proceeds equal to the motor vehicle exemption amount. For instance, if your state’s motor vehicle exemption amount is $3,500 and your vehicle’s worth is only $2,800, the trustee couldn’t sell your vehicle because it’s fully exempt.

Another example, the exemption is worth $3,500 but your vehicle’s worth is $8,000, this means that you have $4,500 nonexempt vehicle equity. In this scenario, you could choose between keeping your vehicle by paying the nonexempt equity to the trustee and letting the trustee sell your vehicle, pay you the $3,500 and using the rest of the money, minus the sale proceeds, for repaying your unsecured creditors.

Using the same figures, let’s say your vehicle’s worth is $5,000, but you’re only allowed to exempt $4,500, which leaves $500 in equity. The bankruptcy trustee won’t probably sell your vehicle since after selling it, deducting the purchase price, and giving you the exemption money, there won’t be enough equity to repay your creditors.

But What If You Have Auto Loan Debt?

The same guidelines apply but your auto loan debt’s amount lowers your vehicle equity. For instance, let’s say you owe $7,500 of auto loan debt and your vehicle’s worth is $9,500, your equity would only amount to $2,500, leaving you a chance to exempt all your vehicle’s equity. On the other hand, if your auto loan debt is $11,500, you won’t need the exemption since you don’t have any equity on your vehicle.

Some Crucial Things to Consider

In the event that you want to protect your vehicle and couldn’t in a Chapter 7 bankruptcy, you could consider filing for or converting to a Chapter 13, advises a bankruptcy attorney in Utah. This would, however, be significantly more complicated since every case is different. Additionally, take note that even if you’ve managed to keep your vehicle safe from the trustee, you’d still have to pay off your auto loan debt, lest your lender repossesses your vehicle.